Question

Kessler GPS spent $180,000 on equipment in January 2016. The equipment had a useful life of 3 years, and Kessler GPS uses straight-line depreciation. In 2017, a new model of equipment came out and Kessler calculated an impairment of $54,000 on August 6, 2017. However, the new model was defective, and older models had an increased market value of $112,000 in 2018. If Kessler GPS is holding their older equipment for disposal, how would they record this late increase in value in March 2018?

A. They would not record the increase in value.
B. They would record a $112,000 increase in value for the equipment.
C. They would record a $68,000 decrease in value for the equipment.
D. They would record a $46,000 increase in value for the equipment.

Answer 1

Kessler GPS would not record an increase in market value for the equipment since it had been previously impaired. Generally, the carrying amount of an asset is not increased after recognition of an impairment loss under accounting principles such as US GAAP. Kessler could recognize any gain upon the actual sale of the equipment instead.

Step-by-step explanation:

The question is addressing the accounting treatment for a change in market value of an asset that is held for disposal by Kessler GPS. According to accounting principles, once a company has written down the value of an asset due to impairment, the asset's carrying amount cannot generally be increased for subsequent recoveries in market value in its financial statements. However, exceptional situations may exist under specific accounting frameworks such as IFRS that could allow for a reversal of impairment in some cases, but this is not the norm in US GAAP.

Since the question does not specify which accounting framework Kessler GPS follows, the conservative and typically applied approach under US GAAP would be Option A: They would not record the increase in value. After an impairment loss is recognized, a company does not typically increase the carrying amount of the asset above the revised depreciated cost. The only adjustment to value that might occur is a reduction in the loss if the asset is sold for more than its carrying value.

If Kessler GPS is planning to sell the equipment, they can recognize any gain on disposal at the time of sale, not before. This potential gain would be the difference between the sale proceeds and the adjusted carrying amount of the asset.